Penalty could have been much worse

Goldman Sachs’ $550m settlement with the US Securities & Exchange Commission marks the steepest penalty ever doled out by the regulator against Wall Street.

It may as well have been $550.

If past performance is any guide, Goldman’s trading desks may make half a billion dollars by the end of next week.

And yet with one jagged stroke of the pen from Gregory Palm, general counsel, Goldman resolved all of the SEC’s inquiries into the mortgage business’s actions during the financial crisis and lifted a pall that had hovered above the bank’s downtown Manhattan headquarters for months.

Goldman Sachs’ shares have dropped more than 20 per cent since the SEC brought its charges against the bank in April. They began to climb by mid-afternoon on Thursday, as word spread that the SEC’s announcement was imminent. But it may not be the Goldman victory it appeared based on the whispers that swirled around the bank in the past three months.

In the end there were no significant corporate governance changes. For instance, Lloyd Blankfein will remain both chief executive and chairman.

It is likely the SEC has left a mark that remains long after the bank makes its wire transfers reimbursing IKB and Royal Bank of Scotland for their troubles stemming from Abacus 2007-AC1 – the collateralised debt obligation at the heart of the regulator’s case.

The charges exposed Goldman to a raft of investor lawsuits, damaged the bank’s reputation and gave ample ammunition to its critics in Washington.

People close to the SEC maintained the settlement was a harsh punishment for Goldman and a strong statement of intent by the recently formed unit charged with probing the CDO market.

In their view, imposing a $550m penalty on Goldman despite the fact its fees for the Abacus CDO were only around $15m was an important victory for the regulators and bode well for future cases.

The SEC has been looking at the CDO market and has requested details from almost all Wall Street banks, and people close to the situation said the Goldman case was just the beginning of its crackdown on abuses in a market that epitomised the excesses behind the financial crisis.

Besides, some legal experts acknowledge, this was a complicated case with no clear-cut villain. To twist the most profitable, powerful securities firm into a record penalty on such a challenging front is an achievement the regulator may savour for some time.

“This will be useful politically to show how the government now has Wall Street under its thumb,” said Annemarie McAvoy, a former federal prosecutor and Morgan Stanley in-house counsel who now teaches law at Fordham University.

Goldman’s agreement to make changes to its internal practices were also seen as a sign of the powers of persuasion of the SEC, even though the bank had announced some of the measures several weeks ago.

The final judgment includes exhaustive technical details about how Goldman should amend an underwriting process that was driven more by traders and two page “term sheets” than by lawyers and detailed offer memos during the boom years.

But with the market for these kinds of deals frozen in any case, many of the stipulations are theoretical, lawyers say. In contrast, Goldman has resolved one of the darkest chapters of its recent history in a very real way.

Whether it marks a turning point in the rehabilitation of a corporate reputation singed by the SEC’s allegations remains to be seen.